Quick Take: Why Break Up GE?

I couldn't help but giggle last Friday when I saw the news reports of a Citigroup (NYSE: C) analyst suggesting that General Electric (NYSE: GE) be broken up to realize greater value.

The first reason I laughed is because Citigroup itself is widely considered one of the best candidates for a breakup. Over the past five years, Citigroup has failed to crack a 1.4% return on assets or a 19% return on equity. Premier financial services firms generally clear both of these hurdles. This line of thought is a bit amusing, but not really important, because the Citi analyst's job is to evaluate his universe of companies, including GE. What Citi is up to is a separate item.

So what about breaking up GE? It sounds like one of those ideas that makes sense on the surface, considering that certain parts of the company are certainly growing faster than others. However, this is a part of the GE strategy: a combination of fast growers and cash cows that provide a balance. Plus, it's not like GE hasn't shown a willingness to cast aside businesses that no longer fit the mold and can't be counted on as growth opportunities or reliable generators of cash. The most recent example is the company's plastics business.

GE isn't a simple business for most investors to understand and properly evaluate because of its diversity. But this diversity also allows GE to be so reliable. Breaking up GE now might deliver some additional funds to shareholders, but what happens to a more cyclical business in the next downturn when it doesn't have the financial strength of its non-cyclical brethren to fall back on?

Of all the conglomerates, GE and, I'd have to say, United Technologies (NYSE: UTX) have done the best at managing their inherit complexity to create value and balance the strengths of different businesses. While some shareholders may be frustrated with GE's stock price the past few years, that's more about a ridiculous valuation assigned to the company in 2000 than any operational missteps. Permanently removing the strength the company has built over the years in its current form for a potential short-term gain doesn't sound like the right move to me.

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